Two Sources Of Cheer For EU

Dutch Elections And Constitutional Decision In Germany Cheer EU

The defeat of explicitly anti-EU parties in Dutch elections and German court's ruling on constitutionality of ESM avert crisis - for now.

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Amiel Ungar, 14/09/12 09:04

Diederik Samsom

Reuters

German Chancellor Angela Merkel was probably correct in considering yesterday to be a good day for the European Union.

The Netherlands, which some analysts consider a bellwether for Europe, ended a streak of elections in which governments that instituted austerity politics have been unceremoniously booted out of office.

The big loser in yesterday's elections was Geert Wilders Freedom' Party that had brought down the government of Mark Rutte. Instead of a policy based on opposition to an overly permissive immigration policy that accounted for Wilders' victory in the last election, this time he campaigned to take his country out of the European Union altogether -- a goal that the electorate judged to be overly extreme.

Rutte made enough tough statements about future bailouts to convince voters to trust him over Wilders. The Freedom Party tacks to the right on immigration, but to the left on welfare. Voters on the right rejected welfare policies and punished both the Freedom Party as well as the Christian Democrats, who had long been a mainstay of Dutch politics.

The Socialist party, that also campaigned against austerity, did not live up to predictions after its leader stumbled badly in the televised debates. Therefore the 2 major building blocks of the coalition will be the center-right party of outgoing Prime Minister Rutte and the center-left Labor Party of Diederik Samsom, the star in this year's elections.

The second piece of good news was the ruling by the German Constitutional Court in Karlsruhe, upholding the German government's support for the European Stability mechanism (ESM) that will be used to bail out financially ailing European governments. This means that Germany will be able to ratify the ESM treaty and make a major contribution to the initial capital of the European financial institution.

The court, however, imposed conditions on its decision. The German legislative branch will have to be fully consulted on any future bailouts and the court effectively put a cap on the German contribution.

What the financial limit and the more extensive consultation with the legislative branch mandated in the court ruling mean, is that the crisis has been averted in the short run. If the euro zone can handle the current financial crises in the dimensions that have been reported, then all is well. If the current wave of optimism persists, then the new financial mechanism may not have to be tested.For example, Spanish borrowing rates have already dramatically declined.

However, the previous experience with ultimate solution, optimistic headlines and a rally in the exchange rate of the euro shows that the market must be allowed time to settle. On previous occasions, the rally and the optimism that generated it evaporated shortly. If the markets turn sour again and countries such as Spain and Italy are forced to request bailouts, then the limits placed by the German courts may prove highly significant and make an extended crisis spiral out of control.

Beyond the immediate challenge of the rescue policy, Europe still faces a competitiveness problem. Unless Europe is able to recapture its competitive edge, it will not be able to avert a future crisis.